SMALL CAP STOCK IDEAS: Caffyns

Sussex and Kent-based car dealership Caffyns is one of many car dealerships that have benefited from the surge in demand for nearly new cars.

The much-publicized shortage of computer chips has led to far fewer vehicles rolling off the production line, forcing car owners who want to upgrade their car to settle for a newer vehicle, as opposed to a new one.

The stock market has certainly picked up on this trend, with industry big players Pendragon, Lookers and Vertu Motors up 66%, 126% and 109% respectively over the past year.

Caffyns has 14 dealerships in Sussex and Kent

Meanwhile, Marshall Motor saw its share price triple over the same period after being acquired by Constellation Automotive, which owns Cinch and We Buy Any Car.

Caffyns, a relative tiddler in the sector with a market cap of £15m, has some catching up to do with his industry peers; stocks are up 4.8% year-to-date and are 43% higher than a year ago.

The company may be a tiddler, but it has a long history dating back over 150 years, although its involvement in the motor trade dates back “only” to 1903.

The company has 14 dealerships in Sussex and Kent and primarily serves the retail and small business market segment.

Its most recent half-year results, released in November, saw the company resume paying dividends thanks to a strong business performance.

Revenue in the six months to the end of September increased to £111m from £85m in the same period of 2020, with like-for-like revenue up 29% while underlying profit before tax jumped to £2.4m from £1.5m.

The increase in revenue was flattered by the fact that the comparative period a year earlier included two months in which car showrooms across the country were closed while profitability was improved by what Simon Caffyn, the company’s managing director, called it “unprecedented used-car performance”.

Caffyns shares are up 4.8% year-to-date and are 43% higher than a year ago

Caffyns shares are up 4.8% year-to-date and are 43% higher than a year ago

Caffyns said used car sales volumes for the period were up 36% on a like-for-like basis, while aftermarket revenue was up 21%.

Its six established franchise businesses saw improved profitability compared to the prior period, with the Audi and Volkswagen businesses performing very well.

The availability of new cars for September’s big half-year license plate change on September 1 has been limited by the global semiconductor shortage and Caffyns expects this issue to affect the second half of September as well. the current exercise.

However, with mixed blessings, the shortage of new cars rolling off the production line is more positive than negative for auto dealers.

Auto Trader, the online car ad site, said the average price of a used car jumped 30.5% in 2021; the average price of a car sold through its platform has now increased for 21 consecutive months.

This has led to the very unusual condition of non-vintage cars becoming appreciating assets. Normally, a three-year-old car with 60,000 miles on the odometer would lose about 5% of its value each year.

“In December, the average asking price of a ‘nearly new’ vehicle (those less than 12 months old) increased by 45% over the previous two years in December 2019, reaching an average price of £34,429.

This huge price growth means nearly a quarter of ‘almost new’ cars are currently priced above their new equivalents, while one in two are priced less than 5% of the new list price,” Auto reported. Trader.

That being said, there are signs that the growth rate is stabilizing in the used car segment.

Caffyns’ strategy is to focus on “representing premium and premium volume franchises as well as maximizing opportunities for premium used cars”.

“We focus on stronger markets to deliver higher returns from fewer but larger locations.

In demand: The average price of a used car jumped 30.5% in 2021, according to Auto Trader

In demand: The average price of a used car jumped 30.5% in 2021, according to Auto Trader

We continue to seek to improve our performance, particularly in our used car and aftermarket operations,” the company’s CEO said in the company’s interim results statement.

The company’s forward order bank for new cars is at a historically high level, so when availability improves in the new car market, the company is poised to take advantage.

Caffyns flagged concerns about Covid-19 infections in his interims, but that was back in late November; since then, the coronavirus situation has not turned out to be as cataclysmic as many feared and the government has felt confident enough to announce the easing of many Covid-19 related restrictions.

So while Caffyns said it remains cautious for the second half of its fiscal year (October 2021 – March 2022), the resumption of dividend payments suggests that management is a little more confident than it is letting on.

Historically, the final dividend has been the same as the interim dividend, so the recently announced interim payment of 7.5 pence implies a full year payment of 15 pence, giving a dividend yield of 2.6%.

The company’s defined benefit pension scheme has a deficit of £9.4million, so it is unlikely to ever be a big dividend-yielding stock as long as the scheme remains in deficit, although some research indicates that the Family businesses tend to be more committed to paying dividends.

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